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How to build a fixed income portfolio?

Fixed income portfolio is a combination of debt investments that add value to the individual’s goal
07 November 2022
    Blog

    While investors are somewhat adept at equity investing given their fascination for stocks, they usually need some hand holding when it comes to building a fixed income portfolio.

    Even when individuals talk of fixed income, they usually have traditional investments like fixed deposits (FDs) and post-office schemes in mind.

    While these investments also form part of the fixed income universe, by ignoring other options in the space, investors hurt their prospects of clocking above-average returns on their fixed income portfolio.

    World of Fixed Income

    Contrary to popular perception, the fixed income segment is several times larger than equities.

    It is a large world, with varied choices for several investor profiles.

    Some of the popular options in the fixed income space include:

    1. Fixed Deposits (FDs)
    2. Fixed income / debt mutual fund schemes with all its variants (liquid, short-term, medium term, long-term)
    3. Post-office schemes (Public Provident Fund, National Savings Certificate)
    4. Government securities (G-Secs/Gilts)
    5. Bonds (Public Sector, Private Sector)

    Fixed income portfolio

    A fixed income portfolio of a debt mutual fund scheme is a combination of debt investments that can collectively add considerable value to the individual’s finances.

    What goes in the making of the portfolio is a combination of two factors:

    1. Your own investment objective and financial goals
    2. The fixed income environment in the country

    Your goals like building wealth for child’s education/marriage, saving for emergencies, are relatively enduring. They do not change dramatically.

    The same cannot be said about the fixed income environment in the country. Many factors like inflation, interest rates, fiscal deficit, monsoons, to list a few, have a bearing on the fixed income environment. Further certain metrics like inflation and interest rates, can be fluid, so predicting the debt environment is quite a task. This makes the job of building a fixed income portfolio challenging.

    Match your fixed income investments to your goals

    Broadly, while building a fixed income portfolio, map your goals with the tenure of investments.

    1. For long-term goals like retirement planning, child’s education and marriage go with long-term debt funds - including long-term gilt funds.
    2. For medium-term goals like saving for emergencies go with debt funds with shorter maturities of less than 3 years.
    3. For short-term goals choose overnight, liquid funds or ultra short-term debt funds.

    Effectively, your fixed income portfolio should be a combination of:

    1. Long-term bond funds and gilt funds
    2. Medium term bond funds
    3. Liquid funds and ultra-short-term funds
    4. Fixed deposits (if you are in the lower tax slabs since interest is added to income)

    The allocation to each fund depends on your goals and how much you have riding on each investment.

    If selected smartly your fixed income portfolio can add much value to your finances and go a long way in fulfilling your goals.

    An Investor Education & Awareness Initiative by HSBC Mutual Fund

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